More than half of all Republicans in the House and nearly half in the Senate happily took credit in their home districts for the stimulus money they voted against.

As of the end of August 2010, $289.4 billon has been paid out to the states.  Many Americans think that at least half the money has been wasted.  Economists have a higher opinion, but no one thinks it is a home run. 

The big concern of Americans is the high unemployment numbers.  We seem stuck in the 9.5% range, but what people don’t realize is that every year, 1.8 million new workers enter the Civilian work force, and just filling these jobs leaves the unemployment rate stuck.  

Many agree the stimulus bill has created jobs.  Economists say it has generated salaries for as many as 2 million workers who would have been out of work without the stimulus, and the government on Recovery.gov points to nearly 750,000 jobs funded by the bill. 

The nonpartisan Congressional Budget Office calculated that the stimulus package saved or created between 900,000 and 2.3 million jobs.

Although the Republicans point to tremendous job losses, it would have been 2 million jobs worse without the stimulus that they voted against as a bloc.

These paychecks, in addition to unemployment benefit extensions and tax cuts have all done their part to advance the economy.  But with only about 35% of the stimulus money spent, it is difficult to say whether it will work or not.

Before the stimulus bill was passed, unemployment insurance was cut off at 26 weeks.  After that time, unemployed workers were dropped from the Civilian labor force unless they had looked for work in the previous 4 weeks.  If they said they had looked for work in the last 12 months, they were considered marginally attached to the labor force.  As of the end of August 2010, there were 2.37 million workers in that category.  Within the marginally attached workers, were 1.1 million discouraged workers, who are no longer looking for work.   

The stimulus bill extends unemployment benefits to 33 weeks, and raised the government payment by $25 per worker per week.  Under the stimulus bill, the government also provides 65% of health insurance cost for the workers for up to 9 months after separation.  This provides much of the employer cost portion that ceased when their jobs were terminated. 

Economists have long expressed that unemployment benefits are a core motivation for economic stimulus by giving people some small discretionary income.  One of the possible side effects is that the financial “cushion” encourages workers to spend their efforts to find an “ideal” job rather than the first one that comes their way. 

In another job-saving effort, stimulus money has been sent directly to states and local governments to help them balance their budgets and avoid mass layoffs of teachers, police officers and firefighters, since states are restricted from deficit budgets. 

Instead of deficits, states and local governments raise cash through the sale of municipal bonds.  During the recent financial crisis, the bond market froze, forcing the municipal issuers to face big budget cuts and cancel programs.  Under the Build America Bonds program, the federal government subsidizes bond payments made to investors, raising the yield to very attractive rates, stimulating the economy and lowering the municipality’s borrowing costs. 

Close to half of the stimulus funded jobs are those that keep states and local governments running.  Those salaries provide money that families can spend into the economy.  

To encourage home sales in an economic sector that was at the heart of the financial meltdown, first-time homebuyers were offered an $8,000 tax credit until the end of November 2009. 

Although home sales rose during much of 2009, as soon as the tax credit expired, home sales plummeted.  The analysis was that people who would have purchased a home anyway moved up their purchase date to take advantage of the tax credit.

There are huge numbers of programs being funded simultaneously in the stimulus bill.  Many of the programs are slow to mature and show benefits.  These are investments in the country’s future rather than a stimulus. 

The stimulus bill provided $100 million for improving and repairing infrastructure items like roads and bridges sorely needing those repairs.  It would also put people to work.  This was the image of the stimulus presented to Americans, and it stuck.  It was, however, a proverbial “drop in the bucket.” 

Although money was allocated for “shovel ready” building projects, there weren’t that many projects ready to go, and a lot of the money has not yet been spent.  The reason?  States are planning and proceeding carefully, trying to get the best value for the money they receive. 

On Labor Day 2010, the president proposed allocating $50 billion to repair 150,000 miles of roads, 4,000 miles of rail lines, and 150 miles of airport runways.  These are expected to create jobs immediately as well as invest in easier transportation of goods and people for the future.  Congressional approval is needed.

The president also intends to urge Congress to permanently extend a research and development tax credit that expired in 2009, and allow companies to write off all of their investments in plants and equipment through the end of 2011. 

Other investments already in the stimulus bill are $40 billion for upgrading the nation’s energy grid.  That should come in handy as solar activity peaks in the next five years and can potentially burn out electrical grids and satellites.  This program will provide many jobs but is still in the early planning stages. 

Another investment drive is green technology, meant to minimize our dependence on foreign oil and minimize potential threats from the Middle East.  The problem is that green technology is still in its infancy; it will provide jobs, but maybe for our children.  It is an investment, not a stimulus. 

With the midterm elections coming up on November 2, and historical evidence that impatient voters will try something new and vote out the “ins”, the president and his council are scrambling for something that will get the notice of American voters.  It is not enough that this president has passed massive reform legislation that will alter the future of this country and its citizens for the better.  When American voters get in that booth, they ask, “What have you done for me lately?”  If nothing comes to mind, they’ll vote for promises. 

The $850 billion will do a lot of good rebuilding America’s future, but the voters need jobs today, and jobs in sufficient quantities are not in view.  The problem is that many stimulus benefits are far into the future. 

Dinner for the family is needed tonight. 

Employer tax breaks follow the “trickle-down” economic theory that says tax breaks given to employers will allow them to save enough money to hire more people who in turn will spend their income on retail goods that will improve the economy and lead to more jobs.  It does not work in a wealth-driven society like ours, but instead causes an ever-larger wealth gap between the “haves” and the “have-n0ts”.  

Tax breaks fall on deaf ears, when an employer is worried whether his goods will sell today and provide a tomorrow for his company and his family.  He will conserve his cash and restrict production in case of a downturn, and therefore unintentionally causing a downturn.  The cash stays with the employer and improves his profit.

The opposite of trickle-down economics is the “trickle-up effect.”  This approach give the tax breaks to the people.  They have more money left over from supplying their basic needs and with their disposable income they stimulate retail trade by buying goods that will improve the economy and lead to more jobs.  

The key to recovery is stimulating retail.  The only way to do it is to put more cash in the wallets of consumers.  An economy runs on cash circulation; as with people, stop the circulation and the patient dies.  

The modification of the Bush tax breaks proposed by the president is a step in the right direction.  By continuing the tax breaks for those earning less than $250,000, it will not cut off their disposable income. 

What the country also needs is an employment incentive; the opportunity for the unemployed to perform work and feel accomplished. 

There is still a lot of money to be spent and a lot of people unemployed.

What if unemployed workers were offered the education they needed to work at a trade, or get their high school diploma?  It is a fact that unemployment is twice as high for those without a high school education.  It is a fact that graduates in fast growing fields like health care and technology are hired much faster than those unskilled. 

What if unemployed workers were encouraged to volunteer as part of their workweek?  People generally don’t like to be charity recipients.  We live in a fair trade society – when we receive something, we have been taught to feel we should give something in return. 

What if?

President Franklin Roosevelt in 1935 had the right idea, employing thousands in public service under the Public Works of Art Project (PWAP), Federal One and others. 

Writers, artists, musicians and other unemployed workers wrote, painted and performed for the depressed public and were paid.  They brought the country’s records up to date by recording and cataloging historical information; they worked on building projects; they repaired bridges and roads; they painted murals in public buildings.  If they had a skill, they used it and taught it to others; if they had no skill, they used their muscles.   The PWAP program failed because of mandated “guidance” from Washington D.C. and the unemployment problem was solved with the outbreak of WWII, but the idea is still compelling. 

There are many opportunities to volunteer in our own backyards.  Every town has Habitat for humanity, food pantries, libraries and other organizations always looking for help.  The requirements are generally simple; just show up and work “friendly.”  It also looks good on a resume. 

What if we suggest a scenario and make an assumption that many business owners need the help, but don’t have the money to hire new employees.  What if they put out a call to the local unemployment office describing their needs? 

What if the issue of salary and benefits never came up – they would be provided by the state unemployment agency.  Perhaps during their “unemployment” employment, the worker would learn a new skill, something of value to put on their resume.  Perhaps their “unemployment” employer would see the value of hiring that person, or provide a glowing reference to their next interview. 

What if?

The IRS offers some help on choosing a tax preparer.

http://www.irs.gov/individuals/article/0,,id=133088,00.html

From the IRS —

It is important for taxpayers to find qualified tax professionals if they need help preparing and filing their tax returns.

• Unqualified tax preparers may overlook or miss legitimate deductions or credits that could cause their clients to pay more tax than they should.
• Unqualified preparers may make costly mistakes like taking illegitimate deductions or credits that cause their clients to initially pay less tax than they should but later incur assessed deficiencies, penalties, and interest when the errors are uncovered. 

Most reputable preparers will ask to see your receipts and will ask you multiple questions to determine your qualifications for expenses, deductions and other items. By doing so they have your best interest in mind and are trying to help you avoid penalties, interest or additional taxes that could result from an IRS examination.

Remember, no matter who prepares a tax return, the taxpayer is legally responsible for all of the information on that tax return.

Here are some suggestions to consider when hiring a tax professional:

Avoid preparers who:

• claim they can obtain larger refunds than other preparers. If your returns are prepared correctly, every preparer should come up with substantially similar numbers. 
• inflate personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients. Preparers may, for example, manipulate income figures to fraudulently obtain tax credits, such as the Earned Income Tax Credit.
• guarantee results and refunds.
• base fees on a percentage of the amount of the refund. A practitioner may not charge a contingent fee (percentage of your refund) for preparing an original tax return.
• delegate your return down to someone with less training or some unknown worker. 
• exports your return to a foreign country for preparation.  Foreign countries do not have the same security and privacy laws as the United States nor is there any recourse should your information be compromised as a result of lax or nonexistent privacy procedures.

Choose a preparer who:

• you will be able to contact and be responsive to your needs.  You should know exactly who works with your tax matters at all times and how to contact that person.  Ask who will actually prepare the return before engaging services. 
• has the proper credentials meet your needs or if your state mandates licensing or registration requirements for paid preparers.   Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection actions and appeals. Other return preparers may represent taxpayers only in audits regarding a return that they signed as a preparer. 
• signs the tax return and provides a copy
• has no questionable history with the Better Business Bureau, your state’s board of accountancy for CPAs, your state’s bar association for attorneys, the IRS Office of Professional Responsibility (OPR) for enrolled agents or the oversight agency in states that license or register tax preparers (as of 2008, California and Oregon are the only two states that regulate paid tax preparers). 

Ask if the preparer is affiliated with a professional organization that provides or requires its members to pursue continuing education and holds them accountable to a code of ethics.

Check IRS.gov for information regarding abusive shelters and other tax schemes and scams. Remember, if it sounds too good to be true, chances are it is.

The IRS can help many taxpayers prepare their own returns without the assistance of a paid preparer. Before seeking a paid preparer, taxpayers might consider how much information is available directly from the IRS through the IRS Web site such as: 

• e-file for Individual Taxpayers
• Free File
• Free Tax Return Preparation For You by Volunteers

Unfortunately, unscrupulous tax return preparers do exist and can cause considerable financial and legal problems for their clients. Examples of improper actions by unscrupulous preparers include the preparation and filing of false income tax returns that claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions.

Even if someone else prepares a tax return, the taxpayer is ultimately responsible for all the information on the return. For that reason, taxpayers should never sign a blank tax form. And they should review the return before signing it and ask questions on entries they don’t understand.

In some situations, the client, or taxpayer, may not know of the false expenses, deductions, exemptions and/or credits shown on his or her tax return. However, when the IRS detects a fraudulent return, the taxpayer — not the return preparer — must pay the additional taxes and interest and may be subject to penalties.

The IRS Return Preparer Program focuses on enhancing compliance in the return-preparer community by investigating and referring criminal activity by return preparers to the Department of Justice for prosecution. The IRS can also assert appropriate civil penalties against unscrupulous return preparers.

Excerpts from public record documents on file show the following examples.

Preparers have been sent to prison for anywhere from two to six years and ordered to pay fines and restitution for defrauding the government and tax evasion by preparing false tax returns in order to create or to increase income tax refunds for their clients, and diverting false refunds to their own accounts.

Preparers have also been sentenced for posing as a CPA, preparing false tax returns, using their personal information and forging their signature in identity theft schemes.

Tax scams have included “experts” “decoding” the IRS code to convince clients they were not liable for federal income tax, “finding” deductions the IRS do not want taxpayers to know about, setting up sham nonprofit corporations to avoid taxes and other “zero tax” schemes. 

Tax evasion is a risky crime, a felony, punishable by five years imprisonment and a $250,000 fine.  Audits can lead to investigations and trials.  Relatively speaking, the number of tax evasion trials is relatively few, but the IRS has a conviction rate of 81-89%, and the average sentence is 18 months. 

The IRS is very accommodating when it comes to paying taxes, especially in this recession.  But if fraud is suspected or uncovered, they can be your worst enemy. 

Report suspected tax fraud and abusive return preparers by completing Form 3949-A and mailing it or a letter with similar information to:

Internal Revenue Service
Fresno, CA 93888

Related Links:
Tax Return Preparer Fraud
Choosing a Tax Preparer ( audio transcript; video)

Millions of Americans now receiving their $10.25 individual weekly windfall from President Obama‘s “Making Work Pay” tax credit may be in for a disagreeable surprise next spring.

The government may want some of that money back.

The tax credit is supposed to provide up to $400 to individuals and up to $800 to married couples as part of the economic recovery act voted into law last February.  Workers began receiving the tax credit in paychecks they received after April 1, when employers were required to implement the new tax tables.

Revised withholding tables issued by the IRS extract less from individual paychecks for the tax credit.  The $10.25 individual weekly rate is based on the 39 remaining weeks in 2009.  It’s a simple change, for people who have one job.

There are, however, circumstances that will cause millions of taxpayers to get much more spendable cash than they are entitled to, and Uncle Sam will want this extra funding repaid at tax time.

The IRS is aware of the problems the tax tables will cause many consumers, but is keeping quiet.  I suppose the IRS is hoping many of the over-receivers will be expecting a refund, and will not complain because their refund will be smaller.  The average refund was just below $2,700 for 2008 income.

Taxpayers who plan their withholding close to their expected obligation might be in for a surprise. 

The revised tax tables credit workers with 6.2 percent of their earned income, up to a $400 maximum for individuals and up to $800 for married couples filing jointly.  Ineligible are individuals grossing over $95,000 and couples taking in more than $190,000.

The tax credit was designed specifically to help boost the economy by collecting less from workers and thereby giving more money to consumers. 

In his appraisal of his first 100 days in office, President Obama praised the tax credit as one of his achievements, promoting that 95 percent of working families will qualify for it in the next two years.

The tax tables don’t take into account several common categories of taxpayers:

• A worker with two jobs will receive a potential $400 increase in the take-home pay at each job, up to $800, but is only eligible for a maximum credit of $400. The excess must be repaid at tax filing time, either through a smaller refund or paying in cash.
• Married couples filing jointly are eligible for an $800 credit. If both spouses work, the new withholding tables give them each $600 (total $1200), and the excess $400 must be repaid. The IRS recognized the problem and adjusted the withholding tables, but the fix was imperfect.

Note: Fifty-five percent (33 million) of married couples have both spouses working for a paycheck.

• A college student with a job making $10,000 will receive $400 that must be returned if the student is listed as a dependent on their parent’s tax return.

Fifty million retirees face even bigger potential headaches.

For people who receive Social Security, Supplemental Security Income, Railroad Retirement benefits or Veteran’s Disability benefits, the Social Security Administration is sending out $250 payments in May as part of the economic stimulus package.  These payments are meant to provide a boost for people who don’t qualify for the tax credit.

Several retiree categories will face potential problems from the new tax tables.

• Retirees who have earned income and Social Security will receive the $400 benefit in their paychecks and the one-time $250 payment in their Social Security check. They must pay back the $250 when they file their tax return.
• Retirees who have federal income taxes withheld from pension benefits will receive the $400 benefit due to the new tax tables, but since pension benefits are not earned income, they don’t qualify for the tax credit and it will have to be returned.
• Retirees with working spouses who are having taxes withheld at the married rate will receive an excess of $400 through the working spouses paycheck that must be returned.

Treasury Secretary Timothy Geithner said in March that both Treasury and IRS understood the concerns and were “exploring ways to mitigate that effect.”  No news since.

Don’t be caught in the repay surprise:

• Check all federal withholding amounts with those received before April 1. Include all paychecks (you and spouse), Social Security and Pension payments. Multiply that difference by the number of remaining paychecks and payments for 2009.
• Check federal withholding for children with earned income. Calculate any overage and have them readjust their federal withholding amounts.
• Change of federal withholding rates and additional taxes to be withheld may be requested on Form W-4 available from employers and the IRS.
• The IRS and many private tax preparers have a calculator on their Web site to help taxpayers figure withholding.

Remember, the maximum benefit is $400 per worker, $800 per married couple.  If one spouse receives only Social Security benefits, their benefit is $250 for a total of $650.

If you did not have earned income, you are not eligible for the $400 recovery tax credit.

IRS website calculator and W-4 form

“Attention Pensioners: Pensioners do not qualify for the Making Work Pay credit, unless they receive earned income.  However, the new withholding tables apply to all taxpayers, including pensioners.  The IRS has a withholding calculator pensioners and others can use to make sure enough tax is being withheld from their pay.  Adjustments to withholding can be made by filing Form W-4P, Withholding Certificate for Pension or Annuity Payments.” 

IRS withholding calculator

Another calculator